Sustainability requirements on the horizon – are you prepared?

Rapid change and transition are already underway

Everyone agrees that progressing to a more sustainable economy is pivotal in order to have a solid and thriving society in the decades to come. Financial institutions play a central part in influencing the pace of transition – however, many financial companies are struggling with the extent and complexity of the external requirements, despite being in favor of increased sustainability regulations. By introducing requirements on integration of sustainability risk into corporate governance, and public disclosure of sustainability related information – EU’s aspiration is that financial companies should be better enabled to make the transition to a sustainable economy. This will in turn strengthen the basis for sustainable investments, and fully integrate and manage sustainability aspects in the financial system. This is where FCG comes in to play. We can assist you in navigating the rapidly evolving regulatory landscape and ensuring compliance by an effective adaptation of the mandatory regulations. The current as well as forthcoming ESG requirements will provide internal benefits, provided your company is aligned with the regulations.

It is often said that “where there is risk there is opportunity”. The risk in this instance, is the negative impact on climate. The opportunity is the benefit for your company, our climate and society at large – if, your company manages to contribute to climate mitigation or adaption.

Farah Tiderman-Keller, Manager FCG

Managing climate risk

Most commercial financial companies today are of the firm opinion that risks related to climate change are the most pressing ESG risks – although there are obvious difficulties in measuring and managing these risks. For this reason, it is important that financial companies develop and implement processes for assessing and managing climate risks, which in turn can be integrated into the company’s strategic work and risk management systems. In addition, it is necessary to consider material climate risks when developing and implementing sustainability strategies.

How FCG can assist with climate risk management:

  • Materiality assessment of climate risks, both physical and transitional
  • The use of climate scenarios and stress testing of climate effects
  • Integration into the risk management systems and policy frameworks

TCFD – not another framework?

The TCFD recommendations focuses on how the environment impacts your company – rather than how your company affects the environment. The overall aim is value-creation and consistent reporting of climate-related financial as well as non-financial risks and opportunities over time. This in turn provides transparency for investors, improves profitability and resilience, as well as potentially reducing climate impact. Although currently not legal binding framework, the TCFD is the most well-known and respected framework for reporting on climate risk. There are indications that the framework will become compulsory over the next few years, so our advice is to treat the TCFD framework as a requirement today.     

Examples of how FCG can assist with TCFD:

  • Perform a GAP analysis (how your current reporting compares to TCFD requirements)
  • Implementation planning
  • Risk inventory
  • Scenario analysis and stress testing
  • Board and staff training
  • Strategic implementation

The EU Taxonomy

EU taxonomy is a green classification system, establishing a list of environmentally sustainable economic activities. A gradual implementation will take place and for the current year 2022, the reporting is based only on the first two (of six) environmental goals, those on climate change, (i) mitigation and (ii) adaptation. However, from 2023 onwards, companies covered by the EU taxonomy are required to report the proportion of their turnover, which is taxonomy aligned. In practice, this means that companies must disclose how much of their turnover meets the requirements defined in the regulation. In addition, reporting will include companies’ expenditure on investments (CAPEX) and operating expenditures (OPEX) related to taxonomy activities.

FCG currently work with a range of companies that report according to the EU taxonomy. Extracting the correct information for disclosure can be challenging, which is why FCG can assist you with implementation:

  • Identify and analyse if or what part of your company’s operations potentially fall under EU Taxonomy
  • Assist in the assessment of performance thresholds
  • Benchmarking against other similar companies

CSRD – the next big thing

Within the next few years, many financial companies in the EU will need to disclose data on the impact of their activities have on people, the planet and any sustainability risks they are exposed to.

CSRD replaces NFRD and is gradually phased in from 2024 through 2028. You might in other words be required to produce your first report in 2025. CSRD has been launched in order to achieve the objectives of the EU Green Deal, combat greenwashing and raise the quality of sustainability information to the same level as financial information. The content requirements will be significantly expanded, the reports will be subject to independent auditing and digital access will be ensured. Business strategy and business model resilience regarding sustainability risks should be disclosed, as well as other “key intangible resources” such as relations with stakeholders. Information should be scientifically evidenced where appropriate – and be provided on a forward-looking as well as retrospective basis.

FCG’s advice on how to prepare for CSRD:   

  • Start now by identify shortcomings in your current sustainability reporting.
    • What is missing for you to be able to live up to the new directive? 
    • How will you extract and collect the information required by CSRD?
  • Secure board and management commitment, as well as sufficient resources.
  • Establish a baseline for reporting and ensure that sustainability reporting becomes part of the business’s overall goals.
  • Review your work with KPI:s
    • Is the business covered by EU taxonomy criteria and if so
    • Are KPI’s in line with Article 8 of the Taxonomy Regulation? (See more on Taxonomy above)
  • Ensure your business model and strategy are compatible with the objectives limiting global warming to 1.5°C (i.e., in line with the Paris Agreement)
  • Define relevant key figures for how the effects of sustainability work will be measured in the long term
  • Conduct a Materiality analysis based on the principle of Double materiality, that is sustainability effects on the business, and the business impacts on sustainability factors

FCG’s advice on the way forward

Sustainability activities in the financial industry have in the past been based on many voluntary frameworks, and due to upcoming requirements – FCG recommends that financial companies start taking measures as soon as possible. Irrespective of which phase your company currently is in; whether you are already mapping climate risks or if ESG-work is new to your organisation – FCG can assist you and provide support throughout the process or with selected elements:  

  • Scenario analysis and stress testing
  • Mapping of risks
  • Financial quantification of risks
  • Strategy and change management
  • Integrate sustainability directives and recommendations into your risk management
  • Drafting of policies and guidelines
  • Advice on ESG governance
  • Create frameworks for collecting high quality data

Farah Tiderman-Keller

Manager

Martin Ahlström

Senior Manager

Matthew Smith

Director & Head of ESG

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Sustainability requirements on the horizon – are you prepared? Sustainability requirements on the horizon – are you prepared?
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